I know it is generally recommended that a US citizen working in Canada should not contribute to a Roth IRA since it is not a shelter in the eyes of Revenue Canada. However, I think you could make a strong case that it makes sense to keep contributing $4k per year if you are unsure of how long you will stay in Canada. As soon as a US citizen moves back to the USA (or many other countries for that matter), the Roth is a great tax shelter.
In order to make a full Roth contribution, you have to have at least $4k of earned income. By using the Foreign Earned Income Exclusion to shelter all your earned income, you cannot contribute to a Roth; however, is there anything to prevent you from "excluding" all but $4k on your form 1040 and use tax credits to offset the double taxation. I cannot find any reference to the ability to exclude only part of your foreign income (except if you make more than the ~$80k max.) It seems to me that this would not cost any more in taxes yet would keep adding to a shelter which may be highly advantageous once leaving Canada. Would this work? Does it make sense?
Thanks!
Foreign Earned Income Exclusion & Roth IRA
Moderator: Mark T Serbinski CA CPA
I have never heard the argument thata a US citizen living in canada should not contribute to a Roth -- IF he can.
A cdn living temporarily in US is ill-advised to contribute, but not the other way round. The reason being that there a re other tax-advantaged vehicles that should be explored FIRST.
A US citizen living in Canada making contributions to a roth is not harming himself in any way, since it would make little sense for him to fund an IRA, and can't funs an 401(k). He can still contribute to an RRSP as well.
The FEIE is becoming less and less viable, due to anti-stacking and the child credit. I see no harm in nort excluding $4000, other than the fact that you will have to pay some US tax on the portion you DID exclude.
Why not just go 1116 all the way?
A cdn living temporarily in US is ill-advised to contribute, but not the other way round. The reason being that there a re other tax-advantaged vehicles that should be explored FIRST.
A US citizen living in Canada making contributions to a roth is not harming himself in any way, since it would make little sense for him to fund an IRA, and can't funs an 401(k). He can still contribute to an RRSP as well.
The FEIE is becoming less and less viable, due to anti-stacking and the child credit. I see no harm in nort excluding $4000, other than the fact that you will have to pay some US tax on the portion you DID exclude.
Why not just go 1116 all the way?
nelsona non grata. Non pro. Please Search previous posts, no situation is unique as you might think. Happy Browsing 
[quote="nelsona"]The FEIE is becoming less and less viable, due to anti-stacking and the child credit. I see no harm in nort excluding $4000, other than the fact that you will have to pay some US tax on the portion you DID exclude.[/quote]
Why would you have to pay US tax on the portion that was [u]excluded[/u]? I thought the only US tax would have been on the non-excluded income (e.g. $4k) which could then be offset by tax credits???
[quote]Why not just go 1116 all the way?[/quote]
That is a very good point. I guess the 1116 is now generally a better way to go whenever a US citizen lives in a higher tax country like Canada. If they live in a lower tax country (e.g. Asia, Middle East), the FEIE would generally make more sense.
Thinking about my proposal in the context of a US citizen living in a very low-tax country (e.g. Singapore) while using the FEIE, it still might make sense to contribute to a Roth; however this would have to be at a very low income level. Otherwise Roth would be tough to justify. For example, if you make $20k working in Singapore, you could exclude $16k with FEIE and use $4k of your standard deduction & exemption to avoid paying tax on the $4k not excluded. This still leaves a single person with $4450 of deduction/exemption to offset passive ordinary income. Qualified dividends & LT Capt gains (at least for 2008-2010) get taxed at 0% up to about $40k income (lower 2 brackets for a single filer). As your income climbs above the lowest 2 brackets, this proposal seems to fall apart.
Why would you have to pay US tax on the portion that was [u]excluded[/u]? I thought the only US tax would have been on the non-excluded income (e.g. $4k) which could then be offset by tax credits???
[quote]Why not just go 1116 all the way?[/quote]
That is a very good point. I guess the 1116 is now generally a better way to go whenever a US citizen lives in a higher tax country like Canada. If they live in a lower tax country (e.g. Asia, Middle East), the FEIE would generally make more sense.
Thinking about my proposal in the context of a US citizen living in a very low-tax country (e.g. Singapore) while using the FEIE, it still might make sense to contribute to a Roth; however this would have to be at a very low income level. Otherwise Roth would be tough to justify. For example, if you make $20k working in Singapore, you could exclude $16k with FEIE and use $4k of your standard deduction & exemption to avoid paying tax on the $4k not excluded. This still leaves a single person with $4450 of deduction/exemption to offset passive ordinary income. Qualified dividends & LT Capt gains (at least for 2008-2010) get taxed at 0% up to about $40k income (lower 2 brackets for a single filer). As your income climbs above the lowest 2 brackets, this proposal seems to fall apart.